New Trade Strategy for the World Economy

Harry G. Johnson, Harry G. Johnson

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000421385
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Originally published in 1969, the studies in tis volume deal with the proposal for a multilateral free trade association initiated by North Atlantic countries in the 1960s. Written at a time of protectionism in the USA, policy problems in the EEC and debates over Britain's role within it, as well as discussions about tariff preferences mean that many of the themes in this volume remain as pertinent today as when the book was first published. As editor of the volume, Harry G. Johnson drew together the threads of a global concept that was commanding increasing attention around the world.

Part I

TIME FOR CHANGE IN TRADE STRATEGY

by

Harry G. Johnson

1 Proposal for a Multilateral Free Trade Association

In the spring of 1966 an influential body of American and Canadian business, labour and university leaders proposed “A New Trade Strategy for Canada and the United States”. It was in similar vein to proposals earlier mooted by Senator Jacob Javits, of New York, and others published shortly afterwards by Senator Paul Douglas, as he then was, of Illinois.¹ The idea struck a chord in Britain and ever since it has been gradually gathering momentum.

What is broadly being proposed is the establishment of a free trade association in industrial products among a group of countries centred on the Atlantic, together with some subsidiary proposals for action in related areas of trade policy. The nucleus of what would thus initially be a North Atlantic free trade area (NAFTA) would be the United States, Canada and Britain and other members of the European Free Trade Association (EFTA). But the plan would be an “open-ended” arrangement which other industrial nations—Japan, Australia, New Zealand and the countries of the European Communities, if they so desired—could also join provided they were prepared to confrom to the relatively simple rules that such a scheme would entail.

Because of this open-ended feature, the term “North Atlantic free trade area” is something of a misnomer, since the prospective members do not constitute a geographical region, as do the members of the Common Market; rather the participants in the New Trade Strategy would constitute an association of geographically separated states. Moreover, not all would be located in the vicinity of the North Atlantic; membership could well extend around the world, from Europe to the Antipodes. Wfaile posing a problem of semantics, the NAFTA label has possibly caught on precisely because, in the Great Debate over Britain’s place in the world, it is relevant to the difference between the Atlanticist and Europeanist schools of opinion. The term is in any case convenient and has become sufficiently established in common usage to warrant employing it as briefly descriptive of the concept of a multilateral free trade association of like-minded nations.

¹See “A New Trade Strategy for Canada and the United States” (Canadian-American Committee, Washington, D.C., and Montreal, May, 1966); Jacob Javits, “The Second Battle of Britain”, Congressional Record, US Congress, Washington, D.C., August 12, 1965, Vol. in, No. 148, pp. 19421-25; and Paul Douglas, “America in the Market Place” (Holt Rinehart and Winston, New York, 1966).

Retention of Sovereignty

A free trade association is an arrangement under which members eliminate tariffs on their imports of goods from one another while retaining their existing tariffs on imports from non-members. It is to be distinguished from a customs union, under which members take the additional step of unifying their original national tariffs into a common tariff against imports from the outside world. It is to be distinguished still more from a common market, in which members commit themselves additionally to freedom of internal movements of labour and capital as well as goods and, also, to the harmonisation and co-ordination of national problems in such areas as monopolies control, social insurance, the structure of taxation and agricultural policy.

This distinction with respect to economic scope and commitment has an important political corollary. Whereas customs unions and common markets have usually been designed either to underpin an existing, or to lay the foundations for an ultimate, political federation or union, this being the political objective justifying the effort and strain of negotiating compromises among the member states, a free trade area is on the other hand a purely economic arrangement without ulterior political objectives. Instead, the appeal of a free trade association consists in the attainment of the economic benefits of free trade and competition over an enlarged market area consistently with the retention of the maximum feasible political sovereignty.

Understanding of this difference of political objectives and implications is especially important in any assessment of the NAFTA proposals, because it is tempting for anyone who has followed the discussion about the pros and cons of British entry into the EEC to assume, quite wrongly, that NAFTA would entail the same type of political relationship with other members of the association and hence to be distracted by irrelevant questions about whether Britain as a member could hope to exercise political leadership with the same leverage as she might hope to do in the new Europe. The argument for British participation in a broadly based free trade association is not that it would provide Britain with an enlarged base for potential political power, but that it would strengthen the economic base of the political power Britain now possesses, much of which she would have to jettison to win admission to the EEC.²

With this as a starting point, the NAFTA proposal must be evaluated in two contexts: (a) the international interest in the liberalisation of trade among nations and (b) the national interests —both economic and political—in international trade of the prospective members.

Momentum of Trade Liberalisation

With respect to the international interest in trade liberalisation, the open-ended free trade area approach constitutes a strategy for continuing the momentum of the movement towards free trade expressed in the successive rounds of multilateral negotiation of non-discriminatory tariff reduction within the machinery of the General Agreement on Tariffs and Trade (GATT) which culminated in the successful completion of the Kennedy Round in 1967. For various reasons it is improbable that further liberalisation can proceed on the traditional GATT lines. NAFTA offers an alternative technique by which those countries which are interested in continuing the process of trade liberalisation can do so without being held back by the reluctance to negotiate of those that are fearful or cautious about further liberalisation. The free trade area approach, in contrast to some other possibilities, is sanctioned by the principles of GATT. While a free trade association confined to industrial products might be held to fall short of the virtually complete freeing of internal trade required by those principles, ample precedent exists in GATT’s reception of the formation of the EEC and of EFTA for expecting that a NAFTA arrangement would nevertheless be accepted as complying with the spirit of the GATT rules.

²On this subject see Lionel Gelber’s study, Part III below.

For other reasons, however, the treaty providing for the establishment of a multilateral free trade association would have to make additional provision, beyond the elimination of internal tariffs on industrial products within a defined period of time, for the liberalisation of trade or of trading conditions. For one thing, the gradual lowering of tariffs has enhanced the significance of distortions of international competition resulting from the presence of non-tariff barriers to trade in industrial products. These barriers would probably have to be brought in some fashion within the scope of NAFTA, probably under the rubric of harmonisation of other policies. On another aspect, the agricultural exporting interests of Canada and the USA and the still more important agricultural exporting interests of Australia and New Zealand, as prospective members, would require some sort of agreement or understanding on how trade in agricultural products should be regulated—presumably via some sort of co-ordination of national agricultural support and export marketing policies. Apart from these predominantly internal trade policy problems, the growing demands of the developing countries for increased export opportunities would in all probability have to be accommodated by special arrangements facilitating entry of their exports to the markets of NAFTA countries. The growing interest on both sides in the expansion of East-West trade would probably dictate the desirability of special provisions with respect to such trade.

Varying National Interests

National interests in the formation of NAFTA naturally differ according to the country under consideration. The Canadian interest, for example, would be predominantly economic. The large body of economic research that has been undertaken in recent years into the causes of the historically invariant differential in living standards between Canada and the USA and the implications for Canada of the Canadian and American tariff structures confirms the hypothesis that the comparative inefficiency of Canadian industry is to be attributed in large part to the short production runs, the excessive diversification and the oligopolistic market structure entailed in producing for a small national market. This research confirms the view, too, that the solution lies in the specialisation and concentration of industrial effort that only free access to a really large external market could make economically feasible and profitable. Reciprocal free trade with the USA alone would probably suffice to serve Canada’s economic ends. But for historical and political as well as current cosmopolitan reasons, a bilateral regional arrangement would suit Canada’s international interests far less well than a broader, and especially a more outward-looking, free trade arrangement spanning the Atlantic (and possibly including the Pacific as well).

The American interest would necessarily be predominantly political in the broad sense; that is, an expression of the responsibility the USA has assumed (and must assume) as leader of the Western industrial nations. The continental near self-sufficiency of the USA makes the material economic gains that might ensue from free trade a peripheral—though not necessarily negligible—element in American policy calculations. For thirty-odd years, America has taken the lead in working for a more liberal international trading system, through the negotiation of reciprocal tariff reductions on a multilateral non-discriminatory basis. During the period since World War II, the USA has also promoted the economic integration of Western Europe, for a variety of economic and politico-strategic reasons. And it has been under increasing pressure in recent years to use its international leadership to facilitate the export interests of the developing countries.

The conclusion of the Kennedy Round obliges the USA to devise a new international trade strategy for the post-Kennedy Round era. The evolution of relations between the USA and Russia towards a co-operative world peace-keeping role, and the circumstances of the failure of Britain’s second application to join the EEC, require a re-thinking of the Grand Design which envisaged European economic integration as a means of building a powerful but loyal political and military ally in Europe against the threat of Communist aggression. The failure of the second United Nations Conference on Trade and Development, held in Delhi in March, 1968, to produce any concrete new proposals to meet the needs of the developing countries leaves the problems of the latter still outstanding. The launching of a multilateral free trade association could be the means of continuing the momentum towards world trade liberalisation, countering the inward-looking tendencies of the EEC as it stands at present (with Britain waiting forlornly on the doorstep) and achieving changes in the trade policies of the advanced industrial nations effectively favourable to the developing countries.

Embracing Global Trading Interests

For Britain, the national interest in such a NAFTA initiative would be both economic and political. Economically, NAFTA offers that access to a really large, rich and competitive market, permitting the full exploitation of British technological accomplishments, which has been the strongest—if not the only—economic argument for attempting to gain membership in the EEC. It does so without the expensive commitment to the EEC’s common agricultural policy and the necessity of discriminating against trade with the other members of the Commonwealth. While some fear that British industry would be unable to hold its own in open competition with American industry, there is the counter-consideration that, as in the case of the establishment of Imperial Preference in the 1930s, membership of the EEC would provide a protected market in the short run at the expense of weakening the competitiveness of the British economy in the long run.

In any case, NAFTA is not strictly speaking an alternative to membership in the Common Market. If British admission to the EEC is to be delayed indefinitely, it may well be judged that the Common Market has ceased to be a relevant alternative and that NAFTA offers the only remaining chance of achieving the desired benefits for Britain of free competition in a large and technologically advanced international market. If, on the other hand, political circumstances were to change unexpectedly and Britain were to be rushed into membership, the new Europe would have to assume the responsibility, commensurate with its enhanced world status, of formulating a commercial policy for its trading relations with the outside world. Britain’s farflung trading interests would indicate the desirability of a more liberal international trading system, the best route towards which might be a free trade arrangement in industrial products among the enlarged Europe, North America and the advanced industrial nations of the Pacific.

Politically, Britain has one foot in Europe and one in the outside world of the English-speaking people. She has still to carve out for herself an appropriate place in the post-imperial, non-Eurocentric world politics of the latter twentieth century. In seeking to join the EEC, she has been attempting to found a new world role on her European geographical location and potential capacity for leadership of the European nations. Her overseas political connections, reinforced by closer trading ties and by the renewed economic strength that free competition and access to large markets could bring, might well provide both a firmer and a more congenial foundation for a world role appropriate to Britain’s experience of and potentialities for leadership.

At the present time, British policy is suspended in the limbo of rejection by the Common Market accompanied by a faint hope of eventual admission. There are those, both in Britain and in the official circles in Washington, still wedded to the Grand Design of a European Union in junior partnership with the American Union. They counsel unending patience and warn against any action or even discussion that might be construed as “anti-European”. Such advice comes uncomfortably close to that of the doctor who is prepared to see the patient die so long as the operation is a success. To follow it would be to preserve the present stasis in Britain’s relations with the Six, without improving Britain’s chances of gaining admission or her claim to membership. To explore the NAFTA proposals seriously would give warning that Britain is not prepared to wait for ever on Europe’s doorstep and that she is not compelled by lack of alternatives to do so.

The formation of a broad free trade association might indeed be the most effective intermediate step towards obtaining the kind of economic and political relationships with Europe that Britain would like to have. For successful adaptation to the competitive conditions of NAFTA would relieve European fears of having to carry the burden of a sick British economy and a vulnerable international role of sterling, while the attractions of reciprocal free trade with the whole NAFTA group would obviously be far greater to European eyes than those of access to the UK market alone.

2 Public Discussion of Policy Issues

The broad considerations behind the proposal for a multilateral free trade association are analysed in the succeeding papers in this book. Published earlier as pamphlets, they form part of a series of research papers commissioned by the Atlantic Trade Study (ATS), a registered educational trust. The ATS was formed at the end of 1966, following the publication of “A New Trade Strategy for Canada and the United States”, referred to at the outset. Its instigators were a group of people of diverse origins and interests who were united in the belief that the trade policy options open to Britain, and to the advanced Western nations in general, required urgent and serious scientific study in Britain.

Members of the group felt, in particular, that the NAFTA proposal was interesting and promising enough to deserve careful and comprehensive investigation whether—as some hoped—Britain succeeded in gaining admission to the EEC or—as others feared and expected, correctly as it transpired—France once more slammed the door in Britain’s face. In either event, it was felt that for the world economy the formation of a broadly based free trade association, within the rules of GATT, could be the next logical step in trade strategy.

The tradition of private sponsorship of independent scientific study of national policy problems is well established in North America, and especially in the USA, where such bodies as the Brookings Institution and the Council on Foreign Relations produce a steady stream of publications oriented towards the rational evaluation of current policy issues and alternative solutions to them. A similar tradition is by no means as firmly established in Britain at the present time. Important policy decisions have frequently been taken in the UK by government in the virtually complete absence of independent outside studies of the alternatives among which choice has been made. This has not always been the case. Indeed, in an earlier period, independent studies sponsored by the Fabian Society and by Political and Economic Planning not only influenced the formation of policy, but were the envy of informed opinion in other countries for the high standard of quality they set and maintained.

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